SaaS: Growth vs Profitability

Emailed on June 28th, 2019 in The Friday Forward

There’s a balance between growth and profit, and it’s measurable.

Typically if you’re growing at a rapid pace, you’re investing heavily in sales and marketing. If you’re growing slowly, you should hope you’re running a profitable operation.

In SaaS, the “Rule of 40” is an excellent way to measure your value and attractiveness to investors.

The Rule of 40 formula is:

Growth Rate (%) + Profitability (%)  

For example, if your growth is 15% and your profit is 20%, your number is 35% (15 + 20) which is below the 40% target. You want this number to be 40% or higher.

This rule is intended for slightly more mature companies, not startups. I think you can begin to measure this when you’ve built out most of your core recurring revenue drivers. Brad Feld pegs this time at around $1 MRR. 

Why I like the Rule of 40: it helps you maintain balance.

Sacrificing profits for growth isn’t bad as long as you’re seeing serious growth. The opposite is also true: slow growth is fine for a cash machine. 

You can learn more about the Rule of 40 here from the SaaS CFO.

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